Question

# Net Present Value Method The following data are accumulated by Reynolds Company in evaluating the purchase...

Net Present Value Method

The following data are accumulated by Reynolds Company in evaluating the purchase of \$121,300 of equipment, having a four-year useful life:

 Net Income Net Cash Flow Year 1 \$42,000 \$72,000 Year 2 26,000 55,000 Year 3 13,000 42,000 Year 4 (1,000) 28,000
 Present Value of \$1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 0.627 0.467 0.404 0.327 0.233 9 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162

a. Assuming that the desired rate of return is 15%, determine the net present value for the proposal. Use the table of the present value of \$1 presented above. If required, round to the nearest dollar.

 Present value of net cash flow \$ Less amount to be invested \$ Net present value \$

b. Would management be likely to look with favor on the proposal?

The net present value indicates that the return on the proposal is (choose one: greater, less) than the minimum desired rate of return of 15%.

a. Desired rate of return =15%

Calculation of present values of the cash inflows :

Yr1 - 72000*.870 = \$62640

Yr2 - 55000*.756 = \$41580

Yr 3- 42000*.658 = \$27636

Yr 4 - 28000*.572 = \$16016

Total = \$147872

Amount invested = \$121300

Net present value = \$26572

b. Yes the management is likely to look with favor on the proposal since the NPV is positive , which means that the return on the proposal is higher than the minimum desired rate of 15%

Looking forward to your upvote. Thanks!!

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